CURRENT LIABILITIES AND PAYROLL CHAPTER LEARNING OBJECTIVES
Solution 14 (10–13 min.) a) January Entries
Cash ... $172,000 Sales ... $163,733*
Unearned Revenue- Loyalty Program ... 8,227**
Stand-alone value of gas sold- ... $172,000 Stand-alone value of loyalty points- (144,000*$0.10*60%) ... 8,640 Total Value ... $180,640
* Allocation to Gas sales ($172,000/$180,640)* $172,000= 163,733*
**Allocation to Loyalty program ($8,640/$180,640)* $172,000 = 8,227**
b) February Entry
Unearned Revenue—Loyalty Program ... 7,250
Revenue—Loyalty Program ... 7,250
Bloomcode: Application Difficulty: Medium
Learning Objective: Account for uncertain liabilities.
Section Reference: Uncertain Liabilities CPA: Financial Reporting
Exercise 15
Dejong’s Drycleaning had the following events occur during December, 2017: Dejong is reporting under ASPE.
1. Dejong signed a $40,000 loan guarantee on behalf of Dejong Junior’s. At December 31, Junior’s had drawn $10,000 of loan advances. Junior’s has sufficient assets to cover its liabilities.
2. Dejong was sued by an irate customer who said the trousers that Dejong had returned to him belonged to someone else. The customer is claiming $10,000,000 in damages for distress because he mistakenly wore the ill-fitting trousers to work and suffered discomfort and embarrassment as a result. Dejong’s lawyer has advised them that the likelihood of this claim succeeding is nil, and has offered to defend them at no charge. The Dejongs have already paid the claimant $100 for replacement of the missing trousers.
3. Dejong was sued for wrongful dismissal by a former employee. The employee is claiming
$2,000 in lost wages. Dejong’s lawyer has advised them that the claim, if taken to trial, is likely to be upheld.
4. In early December, some drycleaning fluid spilled and damaged equipment valued at
$5,600. Dejong replaced the equipment, which is insured, and expects their insurance policy will reimburse at least $5,000 of the cost and possibly the entire amount. However the exact amount covered by insurance has not yet been determined.
Instructions
For each of the four situations above, evaluate the likelihood and measurability of any losses that Dejong may face. Indicate if any liability should be recorded or disclosed in Dejong’s December 31, 2017 financial statements.
Solution 15 (10 min.)
1. The loan guarantee results in a contingency that is highly measurable (both the approved and current loan balances are known) but is unlikely to occur. The guarantee should be disclosed, but not recorded as a liability.
2. The loss related to the lawsuit cannot be measured with any certainty. Common sense would suggest that if there were any loss over and above the $100 already paid, it would not be the $10,000,000 claimed by the plaintiff. In fact, since Dejong's have already paid for the missing garment, any further loss is likely to be minimal. Therefore measurement is very uncertain. The likelihood of any loss occurring is very low, based on the information
provided by the lawyer. This item need not be either recorded or disclosed.
3. The contingency is highly measurable, since a specific amount has been claimed. It is likely to occur based on information provided by the lawyer. The liability of $2,000 should be recorded.
4. If a loss was recorded on the disposal of the original equipment then the insurance proceeds can be used to offset or eliminate this loss. Proceeds received in excess of this loss would represent a contingent and therefore should not be recorded. Since it is very likely that a settlement of some amount at least $5,000 will be received, Dejong should record the estimated proceeds as a recovery of the damaged equipment to the extent of the original loss. Specific note disclosure should also made in the notes to the financial
statements.
Bloomcode: Evaluation Difficulty: Medium
Learning Objective: Account for uncertain liabilities.
Section Reference: Uncertain Liabilities
CPA: Financial Reporting
Exercise 16
Below are several accounting transactions recorded by Lucy, accounting clerk for B&B Industrial.
1. Loss from Liability ... $500,000
Estimated Liability from Lawsuit ... $500,000 To setup a liability in which we are being sued for $500,000. The lawyers say it is unlikely that we will have to pay out this amount and the lawsuit will most likely be dismissed. I have setup the amount based on the best reasonable estimate. Even if the lawsuit is dismissed this event will have a substantial negative effect on the company’s financial position.
2. No entry
B&B Industrial provided a guarantee on a loan for the company’s owner. The owner needed to obtain a large loan for medical purposes. No entry needed to account for the loan
guarantee.
3. No entry
No entry needed to setup the reduction in wages that may be incurred due to employees going on strike.
4. Loss from decline in sales ... $150,000
Sales Revenue ... $150,000 To record the decline in sales due to a recession
5. Gain on Lawsuit ... $365,000
Accounts Receivable ... $365,000 To setup the amount that will be received when we win our lawsuit.
6. No Entry
No entry created for a lawsuit that we will most likely lose because a reasonable amount cannot be estimated.
Instructions
For each transaction, determine if the accounting clerk correctly recorded the transaction. If you disagree, provide the correct transaction or disclosure requirement.
Solution 16
1. Incorrect. No entry should be created. It is recommended to reverse the current entry and disclose the lawsuit due to the fact that the event could have a substantial negative effect on the company’s financial position.
2. Correct. No entry is needed, however a loan guarantee should be disclosed even if the chances of having to pay is small.
3. Correct. No entry or disclosure is required for general risk contingencies that can affect anyone who is operating a business, such as strike, war or recession.
4. Incorrect. No entry or disclosure is required for general risk contingencies that can affect anyone who is operating a business, such as strike, war or recession.
5. Incorrect. No entry can be created since contingent gains are never recorded. Note
disclosure may be appropriate if B&B believes the amount of $365,000 is significant.
6. Correct. No entry will be recorded. Since the amount cannot be reasonably estimated it is only necessary to disclose the contingency in the notes to the financial statements.
Bloomcode: Analysis Difficulty: Medium
Learning Objective: Account for uncertain liabilities.
Section Reference: Uncertain Liabilities CPA: Financial Reporting
Exercise 17
Amber Industries, a local concrete manufacturer, has encountered several situations during the 2017 fiscal year. The company follows ASPE. Identify whether each of the following possible contingencies should be recorded, disclosed, or not reported:
1. Amber is being sued by the municipality of Huntington for contaminating the town’s primary water source. If Amber is found responsible, the company will be required to remedy the waterway. Amber’s legal counsel believes there is a high likelihood that the company will be unsuccessful defending the suit. A specialist has estimated the restoration will cost between 1 million and 1.5 million.
2. Amber has guaranteed the debt of a related company in the amount of $2 million. The related company is currently in good financial health and is not intending to rely on Amber’s guarantee.
3. Amber has a history of lawsuits and has been found liable at least once in each of the past 5 years. Although Amber has not been sued in the current year, management would like to record a $50,000 provision for future lawsuits which is the average payout over the past few years.
4. The government may expropriate Amber’s assets so that a new highway can be built. So far, there have been no discussions about exact amount but the government has assured Amber that the proceeds will exceed the assets net book value.
5. Amber is being sued for $500,000 for wrongful dismissal of a company executive.
Solution 17 (10 min.)
1. Since it is likely that the company will lose and a reasonable amount can be estimated, a liability for a contingent loss is to be recorded.
2. Disclosure required.
3. No accrual or disclosure required as the transaction is not a result of a past event therefore it does not meet the definition of a liability.
4. There will be a gain on expropriation if the proceeds will exceed net book value. Contingent gains are never recorded. Disclosure would be appropriate considering the amount is likely significant.
5. If it is likely that the company will lose and the amount can be reasonably estimated, then this is recorded as a contingent liability; otherwise, just disclose.
Bloomcode: Analysis Difficulty: Medium
Learning Objective: Account for uncertain liabilities.
Section Reference: Uncertain Liabilities CPA: Financial Reporting
Exercise 18
Milner Company is preparing adjusting entries at December 31. An analysis reveals the following:
1. During December, Milner Company sold 8,900 units of a product that carries a 60-day warranty. The sales for this product totalled $200,000. The company expects 5% of the units to need repair under the warranty and it estimates that the average repair cost per unit will be $30.
2. The company has been sued by a disgruntled employee. Legal counsel believes it is likely that the company will have to pay $150,000 in damages.
3. The company has been named as one of several defendants in a $350,000 damage suit.
Legal counsel believes it is unlikely that the company will have to pay any damages.
4. During December, ten employees earn vacation pay at a rate of 1 day per month. Their average daily wage is $160 per employee.
Instructions
Prepare adjusting entries, if required, for each of the four items.
Solution 18 (10 min.)
1. 8,900 units × 5% = 445 units expected to be defective.
445 units × $30 = $13,350
Warranty Expense ... 13,350
Warranty Liability ... 13,350
2. An entry is required because the loss is likely and estimable.
Loss from Lawsuit ... 150,000
Estimated Liability from Lawsuit ... 150,000 3. The loss is unlikely and does not require accrual or disclosure. No entry is required.
4. 10 employees × $160 × 1 day = $1,600.
Vacation Benefits Expense ... 1,600
Vacation Benefits Payable ... 1,600
Bloomcode: Analysis Difficulty: Medium
Learning Objective: Account for uncertain liabilities.
Section Reference: Uncertain Liabilities
Learning Objective: Determine payroll costs and record payroll transactions.
Section Reference: Payroll CPA: Financial Reporting
Exercise 19
The following unadjusted balances are taken from the trial balance of Jackson Equipment at December 31, 2017:
Accounts payable………… ... $ 53,700
Salaries payable……….. ... 2,200 Bank demand loan payable ... 60,000 HST payable……… ... 14,800 Note payable, maturing March 31, 2018 ... 10,000 Note payable, maturing March 31, 2019 ... 100,000
Jackson Equipment sells and installs security systems. Beginning on December 1, 2017,
Jackson began offering a 2-year product warranty. Based on research in the industry, Jackson’s management believes that 5% of security systems will require some warranty work and that the typical costs for systems requiring warranty work will be $875 during the first year and $325 during the second year. In December, Jackson supplied and installed 80 systems.
Instructions
a) Calculate and record Jackson’s warranty liability at December 31, 2017.
b) Prepare the current liability portion of Jackson’s balance sheet at December 31, 2017.
Solution 19 (12 min.) a)
80 systems x 5% = 4 will require work.
Expected cost in first year (2018) = $875 x 4 ... ... $3,500 Expected cost in second year (2019) = $ 325 x 4 ... ... 1,300
$4,800
Entry to record:
Warranty Expense…….. ... 4,800
Warranty Liability ... ... 4,800
b)
Jackson Equipment Balance Sheet (partial)
December 31, 2017 Liabilities
Current liabilities
Bank demand loan payable ... $ 60,000 Accounts payable ... 53,700 Salaries payable... 2,200 HST payable….. ... 14,800 Note payable due in one year ... 10,000 Current portion of warranty liability ... 3,500 Total current liabilities ... $144,200
Bloomcode: Application Difficulty: Hard
Learning Objective: Account for uncertain liabilities.
Section Reference: Uncertain Liabilities
Learning Objective: Prepare the current liabilities section of the balance sheet.
Section Reference: Financial Statement Presentation CPA: Financial Reporting
Exercise 20
Lawler Company's payroll for the week ending January 15 amounted to $52,000 for Office Salaries and $115,500 for Store Wages. The following deductions were withheld from employees' salaries and wages:
Federal and Provincial Income Taxes ... $50,260 CPP ... 7,630 EI ... 3,300 Union Dues ... 2,950 United Way ... 1,500 Instructions
Prepare the journal entry to record the weekly payroll ending January 15 and also the employer’s benefits expense on the payroll.
Solution 20 (10 min.)
Jan 15 Office Salaries Expense ... 52,000 Store Wages Expense ... 115,500
Federal and Provincial Income Taxes Payable ... 50,260 CPP Payable ... 7,630 EI Payable ... 3,300 Union Dues Payable ... 2,950 United Way Payable ... 1,500 Salaries and Wages Payable ... 101,860 To record payroll for the week ending January 15
15 Employee Benefits Expense ... 12,250
CPP Payable ... 7,630 EI Payable ($3,300 × 1.4) ... 4,620 To record employer's benefits expense on January 15 payroll
Bloomcode: Application Difficulty: Easy
Learning Objective: Determine payroll costs and record payroll transactions.
Section Reference: Payroll CPA: Financial Reporting CPA: Taxation
Exercise 21
The following payroll liability accounts are included in the ledger of the David Croneberger Company on January 1, 2018:
Income Taxes Payable ... $4,700 CPP Payable ... 800 EI Payable ... 900 Union Dues Payable ... 400 Health Insurance Premium Payable (Liberty Health) ... 4,000 Canada Savings Bond Payable ... 1,000
In January, the following transactions occurred:
Jan 9 Sent a cheque for $4,000 to Liberty Health.
14 Sent a cheque for $400 to the union treasurer for union dues.
15 Paid the Canada Revenue Agency income taxes withheld from employees, Employment Insurance due, and Canada Pension Plan contributions due.
22 Sent a $1,000 cheque to the Bank of Canada for Canada Savings Bonds purchased on the payroll plan.
Instructions
Journalize the January transactions.
Solution 21 (15 min.)
Jan 9 Health Insurance Premium Payable ... 4,000
Learning Objective: Determine payroll costs and record payroll transactions.
Section Reference: Payroll CPA: Financial Reporting CPA: Taxation
Exercise 22
The payroll records of Fraser Foods Company provide the following data for the bi-weekly pay period ended July 12.
Employee
b) Prepare the general journal entry to accrue the employee payroll on July 12.